Bennet Sedacca
Minyanville.com
What strikes me the most about impaired companies, whether they are automakers, airline companies, banks, brokers or GSE’s is that they seem to sing the same tune, that there is a pattern of behavior. This is how I have attempted to identify in the past what would be in trouble in the future (whether that was just to avoid their stocks and bonds from the long side or to try to profit from their missteps on the short side).
It’s a pattern that isn’t terribly dissimilar from the emotion charts I like to focus on so much. But in the graphic below, I will run this analysis on banks. I call this cycle the “Dead Man Walking Cycle.”
The first “tip-off” or “tell” is when a company releases earnings or some sort of positive announcement and the stock falls. Another important tell is the credit spreads of the debt of the company begins to widen. Then, the company will usually announce that “all is well and is so great that we will buy back stock and not cut the common dividend.” After this comes the “acceptance” phase and write-offs/write-downs are announced and that some sovereign wealth fund or private equity firm will inject capital or that a company within the same group will buy a “strategic stake.” After a brief pop in the stock and short covering rally, the stock begins to fall further and credit spreads begin to blow out and preferred shares get hammered. Then, more write-downs and more write-offs and another capital raise and finally a dividend cut to “preserve capital.”
Sound familiar yet? More
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